THE BLANCHARD COMPANY

The Railroad Week in Review:
Week Ending April 3, 1999


More on the Amtrak wreck. Concerning the railroad's terrible job of informing the press a transportation professional from Ohio writes, "[The Chicago analyst] is exactly right. From a marketing perspective, the railroads do a terrible job. The public's perception DOES matter, even if your business is freight.

"Public perception affects the railroads' ability to build a new line (DM&E), their ability to raise capital, their ability to increase train traffic and/or train speeds, and public and media reaction when there is a wreck or some other unfortunate incident, etc. The freight railroads and the AAR MUST improve the perception that the public has of railroads and AAR and the railroads must educate the public.

"That is the best way to avoid carnage and the best way to improve the overall operating environment for railroads. The program should begin in the elementary schools (and not just a minor program), and receive further support via traditional marketing activities. The public STILL thinks trains are dying away. We must change that perception."

A couple of nights after my most informative visit to the EWS, their Customer Service Delivery Center in Doncaster received a Railway Industry Innovation Award for 1999. There were 26 entrants in the competition, so it's doubly encouraging to see the Center so singled out. And it's well they were. It was most heartening to see the emphasis put on customer service DELIVERY.

Judy Butcher, General Manager of the CSDC writes, "We are very proud to be singled out for our efforts in 'determination to achieve quality performance in the interests of the customer'. It was noted that judges were particularly impressed with the concept of the single CSDC and the speed with which the project had been taken from initial concept to reality in just one year."

By way of review, the CSDC is a 15 mm ($US 24 mm) 41,000 square-foot purpose-built facility taken from initial concept to reality in one year. A team of 320 men and women runs the CSDC in three shifts round the clock. Customer service teams, based on seven commodity groups, are the first point of contact for customers and are responsible for overseeing an order from the first phone call to the first train.

The production team ensures that the train plan is carried out and that any variations or changes are dealt with. The team manages day-to-day train running and keeps in constant contact with the customer service teams and RailTrack, owner of the rights of way used by EWS. The process uses makes sure the right resources are available to match business projections. EWS' customers gain by having a single point of contact and from the reassurance of knowing that their service is the product of integrated planning.

RailWorks Corporation (Nasdaq: RWKS) is a relative newcomer on the rail supply scene having gone public about a year ago. The Company is "a nationwide provider of rail system services, including construction and rehabilitation, repair and maintenance, and related products." For the year ending 12/31/98 it had earnings of $10.4 mm on revenues of $270.0 mm, up from $5.4 mm earned on $256.5 mm sales. There are 15 mm shares out, so it's 70 cents a share this year vs. 36 cents last year.

Debt/equity was a respectable 38% and RWKS was in the news this week as it announced placement of $125 mm of Senior Subordinated Notes. The net proceeds from the offering will be used to repay approximately $100 million of indebtedness and for general corporate purposes, including acquisitions. The notes have an interest rate of 11.50% and are due in 2009 with no interim amortization requirements.

The stock closed Thursday at $10.50. It had come on the market at $11.50 and dropped almost immediately to half that, working its way steadily back up. It will be instructive to watch what happens with this company as it becomes more seasoned and more firmly positioned in is own marketplace.

Florida East Coast has tapped another new addition to its executive suite. This time it's John D. McPherson, late of the IC where he toiled for such worthies as Hunter Harrison and Gil Lamphere. He will join FEC as Executive Vice President-Rail Operations and Chief Operating Officer when his IC duties are completed, presumably about the time the CN-IC merger is official (WIR 3/27/99).

It's a perfect fit. IC and FEC are both north-south railroads in an east-west world. Both are heavily into intermodal and unit trains. Both are dependent on northern interchanges for much of their traffic. And recall it was on McPherson's watch that the IC's operating ratio dropped to 64.9 from 72.5 and the railroad won successive Harriman awards for its safety record. The view from here is it all bodes well for the FEC.

Kansas City Southern (NYSE: KSU) was featured in Wednesday's "Daily Double" feature of The Motley Fool (www.fool.com). Each day The Fool picks a firm whose stock price has doubled in the past twelve months and offers a commentary and a company description.

The Fool writes, "After a record year in 1998, investors have been boarding this eclectic company. The real surge has been with the popular Janus and Berger families of mutual funds, which the company owns. Financial assets under management have been storming ahead in this bull-blessed market. They rose 42% in 1997 and a strong 59% last year.

"Despite the namesake rail company being the smallest of the major players in the train industry, it also was on a roll last year, acquiring Gateway Western and making an investment in Mexico's Grupo TFM (not to be confused with our Foolish counterparts south of the border, Grupo TMF). Since the October lows that found the shares trading in the mid-$20s, this train has definitely left the station. All aboard!"

The Annual Reports for Norfolk Southern, Burlington Northern Santa Fe, and Union Pacific are in. Using my handy-dandy "Rule Maker" analysis spreadsheet (WIR 3/6/99) it was a snap to compare the three on changes in margins, debt, cashflow, and competitive direction. BNSF ranks first in sales growth, net income growth, improvement in operating ratio and decrease in shares outstanding.

Norfolk loses points on flat sales and increased operating costs which hurt the OR year-over-year. However NS continues to lead with the best net margin and gross margin of the three. UNP problems got worse in 1998 as revenues dropped 5% and operating costs were up 8% driving a net loss for the year, an OR in excess of 100, and a slight increase in LT debt.

Comparing 50-day moving average stock price changes is another matter entirely. UNP walks away with the honors, rising to $50 from $40 since last September. Norfolk has remained right around $29 and BNSF rose to $34 from $33. Could this be value investing with a capital Vee?

--Roy Blanchard


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